M&As Flashcards
What is an acquisition?
Acquirer (bidder) purchases all or part of the target’s stock or assets.
Can be friendly or hostile
What is a merger?
bidder acquires all assets & liabilities of target and target ceases to exist : new entity usually takes on new form
- usually stock transaction but can include cash sweetner
What are the types of mergers?
1) Forward Merger
2) Reverse Merger
3) Consolidation
4) Forward Triangular Merge
5) Reverse Triangular Merge
What is a forward merger
The target company merges INTO the buyer and ceases to exist. All its assets, rights and liabilities are absorbed.
What is a Reverse Merger?
A smaller private company absorbs a larger public entity and gets listed in that way.
What is a consolidation?
Both companies cease to exist and create a totally new company
What is a forward triangular merger?
A company acquires a target company through a subsdiary (shell company).
What is a reverse triangular merger?
Used widely by SPACs.
- Acquiring company creates a subsidiary to buy target
- target company absorbs subsidiary to create new company (now totally absorbed inot group/holding company)
What are the 3 types of acquisition?
1) Horizontal: Both firms in same industry (eg competitor) to divide MS & get economies of scale
2) Vertical: Diff stages of same industry: access to resources/distribution.
3) Conglomerate: firms not related, may lead to economies of scasle in provision of company-wide services
What is a merger wave?
A period of time in which more merger bids materialise than usual.
6 since 1895.
What are the 3 most common drivers of a merger wave?
1) Positive stock market conditions
2) Technological change
3) Overcapacity
If stock overvalued, mngt uses premium valuation to acquire through stocks
What were the 6 merger waves since 1895?
1) 1890-1900s: Monopoly competitors consolidate wave
2) 1925-1930: Oligopoly (vertical) wave
3) 1970s: Conglomerate oil companies wave
4) 1990s: Refocusing wave: LBOs
5) Late 90s/early 00’s: Strategic Wave: greed! Eco of scale
6) 2004-2007: Globalisation wave driven by PE market
3 examples of mergers?
1) Vodafone & Mannesmann
2) Delta & Northwest Airlines
3) AT&T and time warner
When + What vodafone mannesmann merger?
Nov 1999 first take over bid refused.
-vod addressed to shareholders directly: 53.7vod/1mannesmann
- hostile takeover might succeed –> mannesmann deal
- final agreement: 58.96vod/1man + better integration (dusseldorf & staff retention)
When+what delta+northwest airlines merger?
15th apr 2008: merger agreement to become largest commercial airline in the world.
Huge ‘back office’ savings (IT, marketing, finance and HR)
When + what AT&T and time warner merger?
22nd oct 2016: deal completed:
-TW library content combined with AT&T extensive customer relationship
- justice department tried to block
-expected $1bn annual cost savings
17 may 2021: AT&T leave entertainment: ownership warner media then merges with Discovery: Warner Bros Discover 8th April 2022.
What is the role of an IB in M&A
1) Comprehensive valuation
2) Merger consequence analysis
3) Select Buyer list
4) Set guideline for range of acceptable bids
5) Evaluate offers received
6) Guide negotiation for disposal price
7) Offer a “fairness option” (independent IB/consultant)
What is the M&A process
1) Hiring the IB (2diff)
- retainer fee: non-refundable
- success fee
2) Valuation:
IB will advice on value maximisation, speed of execution and certainty of outcome, consequence analysis + price expectations
3) Searching for potential counterparty: strategic/financial: negotiated sale/auction (dep #bidder)
4) Bidder confidentiality agreement & confidential information memorandum:
-teaser
-CIM
-BCA (involves NDA)
5)Bidding
- after analysin CIM
6) Defensive MA & SA
- DMA: regulations transation w info on price, timing, consideration, termination (fees)
7) Fairness opinion and closing
- prior to DMA/DSA
= certification about value of deal
Why is M&A still not done deal after signing DMA&DSA?
Need to:
- secure approval from target’s shareholders
- source approval from antitrust authorities (competition commission and office for fair trading)
- arrange financing for the deal
What is a material adverse charge (MAC)?
Sets conditions where bidder can withdraw from deal
What is a Fiduciary out?
An embedded option in DMA/DSA contract:
-Target includes a clause that allow its BoD to change its mind on the sale.
-May be exercised when another offer is tabled
What is a break-up fee?
paid of target to bidder if deal not concluded
What are buy-side motives for M&A?
1) value release: target less than true value
2) value creation: synergies (diversify business lines and get access to new markets or technology)
What are the benefits of synergies?
1) cost savings
2) increase MS
3) improved operational efficiency
4) more product offerings
What are sources of synergy?
change in cash flow(t):
difference between cash flows at date t of the combined firm and sum of cash flows of 2 seperate firms
What are 2 academic studies on synergies and their findings?
1) Strower.M “synergy trap” 1997 –> M&A deals fail to deliver the expected synergies due to lack of planning and execution
2) Kiegler et al 2015 –> looked at key trends and challenges
What are the 4 categories of sources of synergy?
1) Revenue Synergies: cross-selling opportunities, expanded customer base, one-stop-shop, more pricing power
2) Cost Synergies: reduction of duplicate costs and optimisation operations: consolidation of back office functions, less overlapping staff and facilities and increase supply chain
3) Financial Synergies:
-TAX down if one company has unused tax losses - offset against profit of other
- Capital requirements (lower Ke)
4) (Strategic Synergies)
What is the CF effect of merger?
Ch(CF)= ch(rev) -ch(cost)-ch(tax) - ch(cap requirements)
What are other motives of M&A
1) Managerial motives:
- agency problems through acquisitions (prestige, keep job)
2) Diversification:
-combination of 2 cf streams that are not perfectly correlated decreases risk: NPV should be 0 if only motive.
BUT? Is it job of management to diversify the business when shareholders can diversify their own portfolios?
What are takeover defense mechanisms classifications? (shark repellents)
1) Corporate charter and by-law amendments
2) Financial Techniques
3) Structural and strategic actions
What is corporate charter and by-law amendments?
- companies set min acceptable price or SUPERMAJORITY vote (2/3 of 75%)
- US–> reincorporate diff state
What are financial techniques of takeover defense?
1) poison pill
2) golden parachutes
3) issue debt to pay special dividend or purchase “share buyback”
4) Sell crown jewels
What are structural and strategic actions?
1) Seeking a “white knight”
2) “White squire”
3) Management buyout
4) sell crown jewels to friendly
5) Buying competitor (antitrust)
6) Pacman
What are Sarvaes and Zenner (1996) findings on role of IBs in M&A?
1) Transaction cost hypothesis
- acqs more likely to use IB when buy more complex and mngt no M&A exp
2) Assymetric info hypothesis
- more likely IB if target operates in diff industries
3) Contracting cost hypothesis
- purchase public companies
- lower inside ownership (greater free-float)
-hubris potential
What was Allen et al (2004) finding on role of IBs?
- certification effect true if CB advisors for targets
- acquirers: if prior lending relationship: CB due to implicit promise of bank loans
What are the findings of Rau (2000) role of IBs in M&A?
1) Superior-deal hypothesis:
prediction: Acquirers advised by top-tier IBs should earn hihger announcement-period excess return
finding: yes act of signaling quality
2) Deal-completion hypothesis
prediction: no positive relationship between excess returns earned by acquirers and MS of IB (#deals!!)
finding: yes fees are contingent on completion
deal completion: more effort + chance of completion if acquirers pay higher acquisition premiums!!
